The British government has given its approval to the ICB’s recommendations and targets to have the ICB legislation in place by 2015.  The biggest banks in the U.K., Barclays (NYSE:BCS), RBS Group (NYSE:RBS), HSBC (NYSE:HBC) and Standard Chartered Bank (NASDAQ:STAN) continue to remain vocal in their opposition to the recommendations, which will significantly cut their profitability and will severely impact their competitiveness among global banking institutions. The recommendations, which will be applicable to all banks headquartered in the U.K., requires them to “ring-fence” their investment banking and retail banking operations, and also forces them to maintain higher capital reserves than the requirements under Basel III.
We currently have a $15 price estimate for Barclays’ stock, which we are in the process of reviewing in light of the government’s backing of the ICB’s recommendation.
The Independent Commission on Banking (ICB) submitted its final report with suggestions on how to handle banks that were “too big to fail” in early September to stiff resistance from the Big Four U.K. banks.
While the recommendation that these banks maintain equity capital of at least 10% of risk-weighed assets is already very stringent, banks cried foul at the suggestion that banks should separate their retail and investment banking operations. The reasons given for this suggestion was to reduce the risk to retail customers from the volatile investment banking businesses, to make it easier and less costly to bail out banks (retail businesses) in trouble and to aid the process of monitoring banks by introducing more transparency.
The ring-fencing suggestion, which is just short of a complete break-up of the banks’ investment banking and retail banking businesses, would make it difficult for banks to move capital across their divisions. They would consequently have to arrange for different sources of funds for the separated divisions – resulting in additional annual “frictional” costs, estimated to be £7 billion ($11 billion) annually for the country’s biggest banks. This would significantly hit these banks’ operating margins.
Additionally, the banks’ ability to compete with other global banking institutions like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) would be negatively impacted. The higher funding costs would mean Barclays and RBS will have to raise their lending rates, making their loans more expensive than those provided by non-U.K. banks. This would limit growth in these banks’ loan assets in the coming years.Notes: